Given the highly uncertain business environment, small business owners cannot afford to be caught out by unexpected expenses as a result of not having a contingency savings plan in place.
Elize Giese, Head of Investments at FNB Business says failure to save for emergencies can severely cripple the cash flow of a business in the current tough economic environment. It is, therefore, essential for SMEs to cater for emergencies when planning their long-term savings and investment strategies.
“A vigilant balance needs to be struck between saving for emergencies and saving for the long-term growth of the business. Without contingency savings in place a minor incident can translate into a major financial hurdle.”
Giese says there are three important considerations one needs to make before creating a contingency budget.
Defining the emergency
There needs to be a clear definition and understanding of what constitutes an emergency and how much must be put aside for it. This often varies depending on the nature of the business. Examples could be urgent repairs to equipment or a fire in your factory.
Where to save the funds
Ideally, contingency savings should be placed in an account which can be accessed in the quickest time possible. For example, an FNB Business Money on Call account would be ideal because the money can be accessed instantly. For long-term savings like an expansion plan into a new territory, the FNB Business Fixed Deposit is a viable option; it is ideal for investments of up to five years or more.
There are many other investment options available in addition to the two listed above. Because interest rates are higher on longer term products, SMEs that can afford to wait a couple of days to access their money should rather opt for a 7 Day Notice product instead of a Money on Call account. Moreover, bank deposit products are often capital and interest guaranteed, meaning that investors will not incur any risks on their investments, which is ideal for an emergency fund.
How much to allocate for emergencies
Once the type of saving account has been selected, it is important to work out how much should be allocated for savings. This should be done after all the operating costs have been met. Having sufficient cash reserves means the business remains operational even when disaster strikes.
“Businesses should allocate money towards savings in an account specifically structured for business savings and investments, in order to take advantage of interest rates and maximum returns”, adds Giese
“Saving for emergencies is essential and businesses should aim to have at least three months worth of savings that can keep the business afloat when tough times approach”, concludes Giese.